According to Citi, energy stocks will struggle in 2024 due to rising spare oil capacity. This is essentially the amount of oil production that can be quickly brought online and sustained for up to 3 months. Historically, energy stocks have underperformed in years with 3 million barrels per day of spare capacity. 

Currently, estimates are for an average of 4 million barrels per day of spare capacity. Due to this, the bank is forecasting oil prices to end 2024 in the low $70s. It notes that despite the formation of OPEC+, spare capacity has continued to rise with 80% of the growth coming from the US. 

YTD, oil prices are down by 4%, while energy stocks are lower by 3% despite production cuts by OPEC. Citi sees OPEC continuing to act to support the price of oil, but it will have to sacrifice market share to do so, especially given that current prices continue to support capacity growth. 

In terms of positives for the sector, it notes that many companies in the sector are in a strong financial position which makes them less sensitive to the higher-rate environment. Additionally, there has been a surge of M&A activity in the sector which should also support valuations. 

Finsum: Energy stocks have underperformed in 2023 amid falling oil prices. Citi sees this continuing in 2024 especially with increasing spare capacity.